Induction Heating

Minutes of Dept of Trade, London

Subject: Mimutes of at Department of Trace Offices London on Friday 15 February 1985

Present: Consarc Engineering:

TR Dick

Metcalf

Cooke

Present: Government Officials

DJ Hall - Asst. Secretary DTI

Hall - Assistant to DJ Hall/DTI

Langman DTI

Neive - Soviet Section/DTI

Stansfied - Ministry of Defense

Davidson - Ministry of Defense

McCarthy - Ministry of Defense

The meeting had been requested by Consarc following the change in Export Control regulations (Amendment Number 10 - dated February 8, 1985) which made Consarc's Machinoimport contract now the subject of an Export License.

In the light of the change in the legislation as stated above, Consarc had now formally to apply for an Export License for the balance of the shipments.

Consarc formally handed over the Export License Application (copy attached to these Minutes). The application as completed, was in respect of Item 2.7 (Calcarb); the goods presently held at Hull Docks and the spare parts yet to be determined. In addition Consarc had intimated on the license application that in order to fulfill its contractual obligations to the buyer, that it had to carry out final testing on site in Russia, so therefore the license application had to be considered including this work, not merely the balance of items remaining to be shipped.

The Export License application was given a cursory examination and Hall intimated that a quick decision would be made and that it was almost certain that the License would be denied.

A discussion took place on the installation and commissioning aspect of the contract and Hall surprised the Consarc people by intimating whilst the Department of Trade & Industry and the Ministry of Defense were pleased we had brought our engineers back from Moscow, they had no legal power to force Consarc to do so. They elaborated and said that installation engineers could legally continue to work on those parts of the project, shipped before 8 February and could pass information to the Soviets which they had as a result of their knowledge and experience. What is illegal however, is if, to enable them to complete their task they required additional information either in the form of engineering drawings, manuals and so forth to be sent out from United Kingdom, if such documentation was in breach of Amendment Number 10.

The other quandary that they said they found themselves in related to the spare parts yet to be determined. Clearly some items like bolts, screws, 'O' rings, and other standard items are not the subject of an Export License. Other items may need a license. Also the shipment at the Hull Docks appears to contain items which do not need a license but most of the shipment, they believe, does require an Export license. Consarc produced to the meeting two copies of the Metallurgimport contract, together with sales literature on the furnace types and previous correspondence from DTI which confirmed that an Export license would not be required. In view of the circumstances surrounding the Machinoimport contract frustration, Consarc asked them for re-confirmation that the Metallurgimport contract was not the subject of an export license.

Cooke said it wished it tabled that as a result of Amendment Number 10 and the consequent inability to complete its Machinoimport contract, that the company has been put in certain difficulties - both financial and as regards its year-end situation. The DTI said it was aware of these difficulties as a result of talking with ECGD and that DTI had been informed that ECGD was assisting all it could. Cooke agreed that at the moment indications were that ECGD was attempting to process the preliminaries to the claim with all speed and will attempt to shorten the four month statutory waiting period. Having said that however, because of our 31 March year end, the ECGD have been requested that if it is unable to actually pay the claim before our deadline for completion of the year end accounts, then it will make every effort by mid-March to issue a letter confirming that Consarc has a valid claim of "X" million which will be paid on a specified date. Cooke also informed the meeting that after having had discussions with its Auditors on the problem, that so long as this letter is unconditional however if it is conditional, then the Auditors will require to reserve their judgment until it sees the text of any conditions. Whilst the DTI said it would not speak for ECGD it was of the opinion that it was highly likely that the ECGD letter would contain some conditions, as would be normal for any insurer to do under these circumstances (Note - Cooke has since contacted ECGD to ask it to make known to Consarc as soon as possible any conditions likely to be put into the letter).

Turning to the matter of additional costs and losses which Consarc would incur as a result of Amendment Number 10, Cooke said that broadly they fell into three categories:-

Costs easily quantifiable

Such as the 5 % uninsured proportion of the selling price, the interest at 7.8% on the repayable l.2 million, the interest on additional borrowings necessary until the claim is paid, the 10% liquidated damages on the unshipped portion of the contract.

Costs not so easily quantifiable

If the Soviets are contractually within their rights to do so, and indeed if they so choose, they could claim liquidated damages on 10% of the full selling price and ship the goods back in their entirety. In these circumstances the Soviets could also back charge Consarc with all of their costs such as building modifications, foundations, shipping costs, and other costs. There is some doubt as to whether the Soviets have this option and Consarc reported it was seeking legal advice..

Damages to reputation, Loss of future Business

Difficult to quantify at this stage but damage will undoubtedly have been done. The potential order for repeat business of the graphitizing furnaces which we believe we were almost certain to book, is now gone as it is covered by Amendment Number 10..

Neive of the Soviet Section asked what the maximum potential cost to the company could be. In reply Consarc said this was difficult to ascertain at this juncture but if the Soviets did have the right to return all the goods, in fact did so, and invoked its costs, liquidated damages, and other costs, then these costs could be millions of pounds.

In concluding this part of the meeting the DTI said they would note the points we made and advise people in higher authority. Consarc said it would confirm these points in writing.

Metcalf presented a copy of the Soviet Technical journal which had the write up of Calcarb and an advertisement for the Clamshell furnace. He also left the MOD with a sample of the Calcarb product.

The MOD agreed to carry out analysis of the product and to advise if the product required an Export license.

Metcalf also pointed out that the product was already available from West Germany, Japan, and America and that in his opinion the product was not the subject of present export control legislation.

On Wilson's Telex on the new Machinoimport inquiry for more graphitizing furnaces, Hall confirmed that the enquiry would be covered by Amendment Number 10 and that he would confirm this in writing next week.

Consarc asked the DTI if it could explain to Consarc why the project had become the subject of an export license on 8 February, especially as it had been re-confirmed as recently as 3 rd December 1984 that such a license was not required. Whilst Hall evaded the point on the re confirmation of 3 December, he said following the visit of the Customs & Excise late in November, various parties had looked into the uses to which the equipment could be put and in their opinion the equipment could be used in the manufacture of three dimensional carbon-carbon.

Metcalf said that the essence of that technology is the laying-up of the fibers. Consarc does not have nor does it wish to have that technology. Consarc furnaces could be used in the heat treatment of this product.

Neive asked for a value of current potential business in USSR and the names of the relevant buying houses.

Metcalf said the enquiries we had at present were from Machinoimport; Metallurgimport; Licencetorg (Plansee equipment built under license) and that we have had some enquiries in the past from Autopromimport.

Metcalf also wished the meeting to know that Consarc had "walked away" from many other enquiries due to license restrictions.

The background to Consarc's Plansee Agreement was explained to the meeting and that Plansee itself had sold some 4 to 6 units into USSR. The Austrian specification calls for a Siemens 44 controller and Consarc left sales literature on the controller with a view to the DTI confirming that an export license was not required in respect of this controller.

The letter from H M Customs & Excise (copy attached to these Minutes) was handed to the DTI and Hall agreed to follow it up. His opinion was that it was a standard letter and was written by an official who did not know the background to our particular case.

Metcalf asked Hall if the DTI could assure Consarc that similar situations to the Machino one would not occur in the future. Hall said that whilst it was difficult to categorically say it could not happen again in the future, the DTI will look at future correspondence from Consarc on wider front than the strict text of legislation as regards the hardware. He said the DTI already did this for certain exporters. Dick commented that this may result in Consarc being "put under the microscope" and may result in approvals being unfairly withheld. Hall said that this would not happen.

Metcalf informed the meeting that he had dinner the previous evening with Kolosov (USSR Trade Delegation London) and Ivanov (note; not the same Ivanov we normally meet in Moscow).

During that meeting Metcalf said he was informed that during Gorbachev's recent visit to the United Kingdom it had been agreed (either formally or informally) that any subsequent changes to Export Control Legislation would not be retroactive and that it is their interpretation that Amendment Number 10 as it affects the Machinoimport contract with Consarc is retroactive.

Neive thanked Metcalf for this information and said it would be very useful at diplomatic levels (Note. Whilst Metcalf was making the above point on Gorbachev's visit Neive nodded his head throughout. My inference being that Metcalf's statement was being confirmed).

Finally it was confirmed that Amendment Number 10 as it relates to the isopress only will become a multi-lateral amendment to Export Control Regulations throughout CoCom, however that part of the amendment which relates to the furnaces at the moment is unilateral to the United Kingdom only.

Conclusion of the meeting

In conclusion the writer would state that he has mixed feelings about the meeting overall. Whilst the tone of the whole meeting was one of extreme embarrassment and sympathy to our predicament and whilst they asked us to confirm the costs which the frustration to the order would incur, nevertheless there was no offer at this time of any recompense from any Government department in respect of the uninsured losses.

The statement made during the meeting of looking wider at all future Consarc applications for export clearance could perhaps have undesirable undertones as they may deem future business to be subject to export license when in fact this may not appear to be the case.

However, as previously stated the Department of Trade assured us that this would not happen.